26 Jul Using Bank Products to Fend off Deposit Runoff: Part 2: Payroll Accounts
Non interest bearing deposit accounts are the gold standard for most banks in the current market. Rapid fed rate increases have put many banks in a position where their current loans have not yet ballooned and were written when the fed rate was sub 1%. This means that if banks want to continue making a profitable net interest margin they need to continue to have as many deposits as possible in non interest bearing accounts. The problem is that many banks are now capturing deposit accounts by offering 4%+ on savings accounts so some of those sedentary accounts are being moved out of the bank to accounts where they can make money. The key to stopping this runoff is to keep those funds in motion. If the merchant uses their account to run their business they are less likely to move them off the balance sheet. Making deposits sticky and/or adding new accounts has never been more important and in this five-part series, we will expose five simple products and targets to help your bank add or retain deposit volume.
Part 2: Payroll Accounts: 401k, health insurance, tax liability
Payroll accounts are not just paychecks. Employers hold all payroll payables in these accounts and many of those liabilities do not actualize for 30-90 days. This creates a non-interest bearing account that has a large balance around payroll but also an average balance of 30% of payroll for those liabilities that pay out monthly. As a bank looking at these accounts, the average balance should be assessed at that 30% number. This means if a merchant has $100K in payroll each month you can count on a $30K average balance in the checking account.
Offering free checks or checks at a discount can help get you these accounts, but we found offering a product that allows for tax calculations and direct deposit increases the likelihood of converting a payroll account from a competitor. It also reduces the chances of check fraud from employees receiving physical checks with the routing information of the payroll account. These third-party payroll provider integrations for your financial institution offers recurring fee income as well.
Lastly, Payroll accounts offer a window into additional relationships for your bank if you offer them. Banks offering 401k, Issuance products, HSA accounts, and savings accounts can promote specials to the employers’ employees and route these deposits back to your DDAs through the payroll system. Employees gain trust in your institution because their employer does and as long as depositing through split direct deposit is available you can convert not only the business deposits, but you can also create value and convert their employees.